Question

At some time in the future, it is expected that the venture will be profitable enough to start making investments. In order to diversify the risks inherent in investing in individual stocks, the enterprise can choose between mutual funds, index funds, and exchange-traded funds. Describe each of these types of funds and explain which type would be the least risky. You may supplement your answer using outside sources.

Answer 1

Types of funds-

1. Mutual funds- Mutual Funds are are pooling the money of different investors and they will be offering with the specialised monitoring of the portfolio and they will be charging from investors a rate of commission for managing their portfolio and they will be offering various units to the shareholders which will be subscribed by them and these units will be held as securities.

Mutual Funds will be offering with equity investments along with the debt investments and there will be other categorisation under these heads, so they are highly customised type of investment securities offering professional management of portfolio.

2. Index funds- index funds will be replicating the rate of index return and they will be passive investment and they will adjusting in accordance with the proportion of various stocks in the index so they will providing similar return to that of index and they are considered highly safe because there is a high rate of diversification and they are never going to underperform the index

3. Exchange traded fund- Exchange traded fund are those funds which will be continuously traded on the stock exchanges like regular stocks and they are highly liquid in nature and they will be providing investors with simple entry and simple exit so they are preferred for high liquidity.

INDEX FUND will be the least risky out of all these three investment because they will be completely passive investment and they will be offering the similar rate of return in respect to the index.